Financial markets are downright exuberant about the arrival of some trade peace — at least for now — between the United States and China.
President Trump boasted Friday afternoon of a “substantial phase one deal,” including Chinese purchases of American agricultural products and an accord on currency policy. The United States is also holding off on tariffs that were to go into effect next week. Over the last few days, the expectation of such a “mini-deal” between the two superpowers drove stocks up and helped ease recession fears.
There’s no question that this is good near-term news for the economy and the markets. But anybody who has followed the ups and downs of trade policy in the last two years — or who understands the actual ways that the trade wars are affecting the economy — won’t be nearly as optimistic as the president’s words suggest are warranted.
In particular, in the Trump trade strategy over the last two years, tariffs have acted as a ratchet — moving only in one direction or holding steady, never reversing. Apparent agreements are always subject to renegotiation.
The administration turns up the pressure on China with sharp words, higher tariffs and promises of future tariffs. The Chinese retaliate, aiming to punish American interests. The stock market drops, which prompts negotiations to resume, and the administration backs off the pledged escalation.
Friday’s events represent the latter stages of that cycle. It’s particularly evident when you look at what the de-escalation consists of. It did not reduce tariffs already in place on Chinese imports but rather further delayed an increase that was announced during the escalation phase over the summer.
“The only things we’ve learned are that Trump loves tariffs and he doesn’t have a long-term plan,” said Mary Lovely, a senior fellow at the Peterson Institute for International Economics. “Are these guys in markets like Charlie Brown and the football?”
The central tensions between the United States and China — and the domestic political constraints on each side that stand in the way of an overarching deal — remain very much in place. China’s president, Xi Jinping, cannot back away from goals of dominating many of the industries of the future; President Trump cannot acquiesce to those goals without huge political risks. The new “phase one” deal does not address one of the most fraught issues, around the ability of the Chinese telecommunications company Huawei to sell in the United States.
Moreover, the recent history of American trade policy implies that even when a deal seems to be signed, sealed and delivered, it doesn’t mean trade peace has been achieved.
In June, President Trump threatened to put new tariffs on Mexican imports to force the Mexican government to do more to curtail migration from Central America. The threat came after the conclusion of extended negotiations to rework Nafta into the United States-Mexico-Canada Agreement.
Even though those particular Mexican tariffs never went into effect, the message to businesses was that trade tension is a new normal — not a limited, tactical war with achievable goals, but a perpetual state of aggression that can become more or less intense at any particular time.
You can see that recognition in how businesses are behaving. The scale of the tariffs actually being collected thus far remains moderate relative to the scale of the United States economy. But there is plenty of evidence that this sense of trade chaos is hanging over business decision-making, especially in the export-focused manufacturing sector.
“Markets may respond, but that doesn’t mean that firms will,” said Emily Blanchard, a trade economist at Dartmouth’s Tuck School of Business. “It’s firms’ decisions that matter for the economy.”
Business investment spending subtracted from overall G.D.P. in the second quarter, and job creation by the factory sector has slowed enormously in 2019 — only 3,000 jobs a month, down from 22,000 in 2018. A report on September factory activity showed it in negative territory.
“It is difficult to take that much comfort from the latest signs of progress given that we’ve had plenty of apparent truces in recent months end abruptly in a sudden further escalation in trade tensions,” Michael Pearce, senior United States economist at Capital Economics, said in a note to clients.
He noted a twist: The agreement on currency policy that is a key part of the new deal was part of a previous truce that then fell apart during a period of re-escalation.
As that shows, in Trump-era trade policy, the risk of a major disruption to world commerce never really goes away. It just arrives in unpredictable waves — and Friday’s deal represents a low ebb.